Amgen Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amgen is a global biotechnology company operating in one segment: human therapeutics. Comparisons below are with Q1 2017 unless otherwise noted; figures are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $5.554 billion | $5.464 billion | +2% |
| Product sales | $5.343 billion | $5.199 billion | +3% |
| Operating income | $2.726 billion | $2.591 billion | +5% |
| Net income | $2.311 billion | $2.071 billion | +12% |
| Diluted EPS | $3.25 | $2.79 | +16% |
| Operating cash flow | $2.727 billion | $2.385 billion | +14% |
- Margins: Operating margin was approximately 49.1%, versus 47.4%; net margin was approximately 41.6%, versus 37.9%. Cost of sales was 17.0% of revenue, down from 18.2%.
- Revenue mix: U.S. product sales rose 1% and rest-of-world sales rose 8%. Other revenue fell 20% to $211 million, mainly because of lower milestone payments, partly offset by higher Ibrance royalties.
- Cash and liquidity: Cash, cash equivalents and marketable securities totaled $32.172 billion at quarter-end, down from $41.678 billion at December 31, 2017. Current assets were $40.689 billion and current liabilities $10.479 billion.
- Debt: Carrying value of total debt was $35.541 billion, including $2.183 billion current and $33.358 billion long-term, versus $35.342 billion at year-end. Approximate debt less cash and marketable securities was $3.369 billion.
- Cash flows: Investing activities provided $14.906 billion, largely from net sales and maturities of marketable securities; financing activities used $11.692 billion, chiefly for share repurchases and dividends. Capital expenditures were $155 million.
- Shareholder returns: Amgen paid $951 million in dividends and repurchased $10.7 billion of stock for cash, including a $10 billion tender offer. Quarterly dividend was $1.32 per share. The board added $5 billion to the repurchase authorization in April.
Changes and business developments
- Sales growth was led by Sensipar/Mimpara (+18%), Prolia (+16%), XGEVA (+11%) and other products (+22%). Neulasta fell 5%, Enbrel 6%, Aranesp 11% and EPOGEN 10%.
- Management attributed lower operating expenses overall to reduced royalties and intangible-asset amortization, alongside transformation and process-improvement efforts. SG&A increased 6%, mainly from product launches and marketed-product support; R&D decreased 1%.
- Amgen acquired Kirin’s remaining 50% interest in Kirin-Amgen, making it wholly owned. It paid $780 million in cash, gained control of related licensing rights and future royalty economics, and recorded an $80 million net gain from remeasurement and settlement of prior relationships. Preliminary acquired-asset valuations remain subject to change.
- Weighted-average diluted shares declined 4%, primarily due to repurchases. Stockholders’ equity fell to $15.620 billion from $25.241 billion, with substantial repurchases contributing to the change.
Outlook, risks and unusual items
- The filing provides no consolidated full-year revenue or EPS guidance. Management estimated 2018 capital spending of approximately $750 million and said it expects to continue investing in the business and returning capital through dividends and repurchases.
- Management expects Enbrel’s lower unit-demand trend to continue and its 2018 net selling price to decline slightly. Aranesp is expected to face increasing competition; biosimilar competition for EPOGEN and Neulasta could affect future sales. Neulasta’s U.S. patent protection has expired, and Sensipar’s U.S. composition-of-matter patent expired in March 2018.
- The effective tax rate declined to 11.8% from 15.8%, primarily reflecting U.S. tax reform. Estimates under the 2017 Tax Act remained provisional and could change during 2018. Amgen estimated a $7.3 billion repatriation tax, payable over eight years; the first annual payment was made in April 2018.
- An IRS audit for 2010–2012 proposes substantial adjustments, principally concerning profit allocation between U.S. and Puerto Rico entities. Amgen disputes the adjustments; an unfavorable resolution could materially affect results and cash flows. The administrative appeals process was not expected to conclude within 12 months.
- Patent and regulatory disputes include litigation concerning PCSK9 products, Sensipar, KYPROLIS, Neulasta/NEUPOGEN and Enbrel. The filing says outcomes are uncertain and that an adverse determination in one or more matters could materially affect results, financial position or cash flows.
- Amgen expects to adopt lease-accounting requirements in 2019 and anticipates a material balance-sheet effect from recognizing operating lease assets and liabilities, but no material income-statement impact.
Key facts investors should verify
- Whether growth in higher-demand products can offset declining sales and pricing pressure in established products, particularly Neulasta, Enbrel, Aranesp and EPOGEN.
- How biosimilar and generic launches, patent litigation and regulatory decisions affect product sales and market exclusivity.
- The final tax-reform accounting estimates and the timing and cash-flow effects of the estimated $7.3 billion repatriation tax; also monitor the IRS audit dispute.
- Whether the large repurchase program and dividend commitments remain consistent with debt service, liquidity needs and planned investment.
- Final valuation and amortization assumptions for the Kirin-Amgen acquisition, and subsequent results from the acquired rights.